Connecting the dots- deficit reduction is now only about inflation, not insolvency

And from all the responses to the S&P downgrade by economists and financial professionals from the four corners of the world,

THE WORD IS OUT!

The US government is the issuer of the US dollar.

So no matter how large the federal deficit might be:

The US government can always make any payments in US dollars that it wants to.
There is no such thing as the US govt running out of US dollars.
The US government always has the ‘ability to pay’ any amount of US dollars at any time.

NOW CONNECT THE DOTS TO:

The US is not dependent on tax revenue or foreign borrowing to be able to spend.

And,
whereas Greece is not the issuer of the euro,
much like the individual US states are not the issuer of the US dollar,

THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE

There is no such thing as the US getting cut off from spending by the financial markets and forced to go begging to the IMF to get US dollars to spend.

Nor is the US government subject to market forces driving up interest rates on US Treasury bills.

EVEN AFTER BEING DOWNGRADED US TREASURY BILL RATES REMAIN NEAR 0%

Why, because, any nation that issues its own currency also sets its own interest rates.
So in the US, the Federal Reserve Bank votes on the interest rate

SO, THEN,

WHAT IS THE POINT OF DEFICIT REDUCTION?

Suddenly, it’s NOT solvency.
The US is suddenly NOT going broke.
Social Security is suddenly NOT broken.
There is suddenly NO risk the US will not be able to make all payments as promised.

So now,

the deficit hawks must CHANGE THEIR REASONS FOR DEFICIT REDUCTION
or shut up!

they must FLIP FLOP
or shut up!

Yes, there is a new reason they can flip flop to.

Inflation.

They can start claiming the current path of deficit spending will lead to inflation.

Fine.

Bring it on!

First, they need to do the research, as they haven’t even thought about this yet.

Then they have to convince Congress to cut social security and medicare
Not because we might become the next Greece
Not because the US government checks might bounce someday
Not because the deficit will burden our grand children

But ONLY because some day,
if we don’t do something when the time comes
and even though we don’t have an inflation problem now,
and haven’t had one in a very long time,
SOME DAY far in the future,
inflation might go from x% to y%.

Fine.

Do you think Congress would take draconian steps now,
during this horrendous recession,
to make things worse
by cutting Social Security?
and by cutting funding or public infrastructure?
and by raising taxes?

I see, that makes sense. My question was more simple: was your comment directed at Aeolius’ post, and if so I wasn’t sure what point you were making, since Aeolius didn’t seem to be asking a question, but seemed to be saying that global sustainability in the face of limited, hotly competed for resources was uncertain, along with ecological disturbances. He/she seems to think that this is a recipe for war eventually.

Well, China has no domestic market in proportion to its holdings. It needs foreign customers. It doesn’t have a lot of time. It can’t very well buy up US assets in China and then sell back product to the US–to an effectively shrinking customer base. What it probably should do with the dollars is do what the foolish US austerity measures won’t let the US itself do for itself: furnish credit to Americans, to cities, to towns, modernize infrastructure (railways, above all), and pursue alternative energy investments, different housing and urban arrangements, and so on. In short, create jobs and more sustainability–if they could work with the right people and ideas. Others have already suggested this entry of China into banking in the US.

However, above and beyond all that, the combination of the endless growth “development” ideal in the US, Europe, Russia, China, and India, puts a serious strain on resource and energy availability, creates serious tensions and conflict, and who knows how much potentially catastrophic ecological imbalance. And there are just too many people. Eventually, serious wars are almost a certainty.

“Reality has a liberal bias.” That’s why the right seeks to impose political restraints.

That is very funny. Tom, and a kind of summit of wishful thinking. You are very American. :-) See Chairman Mao: “power comes from the barrel of a gun.”

Regarding Hudson, I think you’re right about his strategy. He grew up in a Marxist environment. Very political. At the same time, he can say things that really do deviate from the paradigm when it comes to monetary operations, apparently not his strongest side. He also has a strong China bias (married to a Chinese, I believe), hence his somewhat off-paradigm explanations there as well.

@aeolius,
Ha ha, I love how Hudson will contact Chinese officials with helpful suggestions like using their dollar reserves (to use American legal terminology) to condemn by eminent domain US investments in China… with just value for compensation established by the US companies’ own book values. Since book values tend to be rather low for tax reasons, Hudson’s enormously clever idea is a twist on Lenin’s line, “The Capitalists will sell us the rope with which we will hang them”.
The genius part of this idea is it allows China to scare the hell out of the White House, and of course US CEOs (perhaps this is why Jeff Immelt is working part-time at the WH these days) without posing any kind of security threat to the American public. FDR’s Pearl Harbor speech would have fallen a little flat if Japan had merely eminent domained US investments instead of bombing the Pacific Fleet.Dear Premier Wen Jiabao,
I write this letter to counteract some of the solutions that Western politicians are recommending for China to cope with its buildup of excess foreign-exchange reserves.. The most workable solution is to use its official reserves to buy back US and other foreign investments in China’s financial system and other key sectors.http://michael-hudson.com/2010/07/dollar-hegemony-and-the-rise-of-china/

I am aware of Hudson’s being a faculty member, for heaven’s sake.
Tom, you really need to measure your language. Call someone else a sucker, please.

Hudson is not a man of “power.” He is a professor. He is an intellectual and not a politician, with an intellectual’s responsibilities for putting the truth above all things. I go by what he writes, not by what I might speculate regarding his motives. And people who read him will also go by that. I stand by my remarks.

I was using “you” in the colloquial generic sense, not aiming personally. Sorry for the confusion.

I think you are confused about Hudson. Most of what he does for public consumption is politically oriented, highly polemical, and populist in appeal. He has worked out a strategy for attacking his targets (rentiers, the financial elite, the military-industrial complex, and the ruling elite in general). This strategy, not unlike Noam Chomsky’s since he submerged his linguistic research, is quite effective in getting him exposure in diverse venues from Democracy Now to Max Keiser. The range and depth of his effect is pretty broad and deep, and he has been at this awhile. Super Imperialism was first published in 1972 IIRC.

Michael Hudson is not just standing up and telling the truth. That’s what every scholar is supposed to do. He has been on the offensive for along time, just like Chomsky. They choose their targets and attack them strategically in a very public way, not through academic publications. Conversely, most academic that play public roles are “celebrities” and get paid big bucks to represent the status quo. They are basically lobbyists.

Michael Hudson now has a professorial appointment at UMKC, he has not been only an academic in his professional life. He was employed in the financial sector. In fact, he reports that it was his employment in the financial sector that radicalized him, just as serving in the military during Vietnam radicalized me.

BTW, Michael Hudson is hardly the odd man out at UMKC, although he is the furthest to the left. Bill Black and Randy Wray have been increasingly in the attack from left of center. Marshall Auerback, too. Of course, Bill Mitchell has also been a sharp critic of the status quo from the left for a long time.

In his political campaign, Warren advertised himself as a Tea Party Democrat (as a libertarian rather than a progressive). I would call his position center left, and he is the most “conservative” of the MMT economists that have a political agenda in addition to an economic one. There seems to be at least an implicit strategy developing here as the group becomes more influential wrt policy alternatives.

Folks like Joe Firestone, selise and Lambert Strether are spreading MMT as the progressive solution that works in the progressive blogosphere.

Jamie Galbraith, an MMT ally, is also unabashedly progressive and a strong advocate of reform, and Yves is giving MMT as push at Naked Capitalism, as well as sounding the voice of outrage, too.

This is shaping up into a contest between MMT and the Libertarian/Austrian and conservative/neoliberal cohorts over policy, with MMT doing its best to either bring aboard liberals and progressives that are clueless about monetary economics, Minskyian financial instability, etc., or else sideline them if they don’t come over.

I don’t know whether there’s time and resources to ramp up for ’12, but I suspect that this conflict will be front and center in ’16, given the way things are heading. MMT’ers need to work on the up and coming political candidates and let the others die off or see themselves replaced.

You can’t go further left than Bill Mitchell. And I think its silly to suggest that MMT has no ideological bias. The paradigm is built around the potential for deficit spending, which is definitely ideological.

I think this is correct, anon. “Reality has a liberal bias.” That’s why the right seeks to impose political restraints.

beowulf Reply:August 13th, 2011 at 3:00 pm

@Calgacus,
And then you have people like Matt Franko and me coming at this as paleoconservatives, both of us voted for Pat Buchanan back in the day. Can’t speak for Matt but I think in terms of microeconomics (macro still 2 years in the future), Henry C. Simons was definitely on the ball.[In] A Positive Program for Laissez Faire (1934) Simons set out a program of reform to bring private enterprise back to life during the Great Depression.
“Eliminate all forms of monopolistic market power, to include the breakup of large oligopolistic corporations and application of anti-trust laws to labor unions. A Federal incorporation law could be used to limit corporation size and where technology required giant firms for reasons of low cost production the Federal government should own and operate them… Promote economic stability by reform of the monetary system and establishment of stable rules for monetary policy… Reform the tax system and promote equity through income tax…”http://en.wikipedia.org/wiki/Henry_Calvert_Simonshttp://billtotten.blogspot.com/2009/12/positive-program-for-laissez-faire.html

beowulf Reply:August 13th, 2011 at 3:26 pm

@Tom Hickey,
“This is shaping up into a contest between MMT and the Libertarian/Austrian and conservative/neoliberal cohorts”

Its an accident of timing, were John McCain in the WH now, he’d be running even bigger deficit, the GOP keeping the Austrians safely locked up in the attic. Meanwhile the grass roots power would on the side of neoliberal anger at the budget deficit (with Pete Peterson astroturf the one constant in the multiverse) and groups like US Uncut working for “tax the rich only” deficit reduction bills.

The party out of power always tries to kneecap the party in power over the deficit issue, when they switch places they switch arguments. As Rick Boettger commented:This hideous strategy works
because, bizarrely, when the
minority party cold-bloodedly
shuts down the government
and kills needed bills, it is
the majority party and the
President who get blamed.http://www.kwtnblue.com/2010/03/rick-boettger-minority-treason/

@Anon, You can’t go further left than Bill Mitchell. Lots of people further left. Took the political/social test he displays on his site somewhere. Was slightly to the right of him on social matters (I guess he thinks dogs & cats should be allowed to marry.) But a bit to the left politically

Like Tom says, it’s reality that has the bias. MMT is a scientific theory, not a policy program, and has no real ideological bias. Unlike most economic theorizing, it makes logical sense and applies to the real world. It appears ideological to the extent that what is called “right” or “conservative” has a superstitious, flat-earth, pro-human sacrifice for astrological purposes bias, and hardly all of the “right” does.

I suspect bill was classified further left before mmt, which defuses both the mainstream left and right

anon Reply:August 13th, 2011 at 8:27 pm

The MMT approach to deficit spending and inflation control pretty well implies ELR, whether or not ELR is stated explicitly as part of the package, and it often is anyway. So I think its difficult to separate MMT from ELR. That’s what seems ideologically left to me.

I would call JG/ELR “employment assurance” and refer to it as a buffer of employed instead of a buffer of unemployed. It really is not ideologically left seen in the light of economic efficiency. The countries greatest loss other than loss of life and limb in war are idle and deteriorating real and human resources. I don’t see it as a political argument based only on ideological norms. There are a sound economic criteria to roll out for adopting it as policy.

“I would call JG/ELR “employment assurance” and refer to it as a buffer of employed instead of a buffer of unemployed. It really is not ideologically left seen in the light of economic efficiency. The countries greatest loss other than loss of life and limb in war are idle and deteriorating real and human resources. I don’t see it as a political argument based only on ideological norms. There are a sound economic criteria to roll out for adopting it as policy.”

many things that both left and right espouse are ideologically based rather than on economic efficiency. Generally, when one sees a moral argument, that is the tip off. Both sides frequently make moral arguments based ideological norms, or should I say regularly.

Re: the ideological bias .. the deficit argument cannot be given for it.

Simply because of the sectoral balances approach, if the private sector wants to have a lot of saving, the government has no alternative to accommodate this unless it is prepared to run the economy in less than full employment.

“The Review is written in a style that any trade union official should be able to understand”.

Ramanan Reply:August 14th, 2011 at 8:27 am

Anon,

Even Ben Bernanke recently in a hearing mentioned that if the politicians want a balanced budget rule, it should be worded such that during recessions the rule is not followed or something of that sort.

So he is going in that direction – seeing the budget balance as endogenous and attempts to tighten the fiscal stance putting the economy into recession.

Ramanan, “living beyond our means” is a contemporary US campaign slogan of the GOP conservatives for “fiscal sustainability” and a balanced budget amendment. “Make the rich pay their fair share” is the corresponding campaign slogan of the Democratic progressives to end the Bush tax cut for the wealthy, to eliminate tax breaks and subsidies that constitute “tax spending,” and to increase progressive tax rates. Both appeal to ideological norms rather than sound economic reasoning.

Randy’s 2002, A Monetary and Fiscal Framework for Economic Stability, shows how MMT is a “cleaned-up” version of Milton Friedman’s 1948 proposal of the same title. Pretty much same as Friedman’s basic intent, but in light of sectoral balances. Randy assumes that MF’s proposal was based on Lerner, whose work was au courant t back then.

Tom, don’t put “uh’s” before your comments. It is sophomoric and disrespectful.

You are wrong about Hudson. He is inconsequential and out of paradigm, and I’m sure Warren would agree. And it is frustrating. This despite his evident very good points and courage. Make all the excuses for him you like, but double-speak and your “traction” lead to further confusion. If “traction” is so desirable, let’s blame Warren, Auerback, Fulwiller, Wray, and the rest, for lack of realism. Two weights, two measures.

I disagree. Most people of power and influence make strategic decisions consciously and intentionally. A lot of people understand the basics of monetary and fiscal operations under a fiat system and don’t let on for a variety of reasons. They are acting strategically, which often involves being disingenuous. That is the way of the world, and everyone knows this. If you don’t know it, you are the sucker who is the mark.

Someone needs to tell the truth over and over again until it is finally accepted, however. These are patriots and heroes. In other cultures there is great financial and even physical risk. Here one is just marginalized, ignored, and maybe insulted. Actually, being insulted is a good sign, because it shows that you are being noticed.

Anyone who thinks that Michael Hudson does not understand the details of the debate about creditary economics should follow the gang of 8 at Yahoo Groups.

Even Greenspan suddenly “discovered” the truth that the US government cannot default when the default debate came down to the wire. Did he just find that out? Hardly.

Anyone who thinks that what people say is what they actually think is naive. Almost no one in any position of power or influence shows their cards unless it profits them or is expedient.

As per Scott Fullwiller, both Michael Hudson and Bill Black are very much on the MMT bandwagon and paradigm. He ought to know, since his office is only a few doors down from both their offices, and talks with them quite often.

@Clonal Antibody, Yes, I agree with Tom & Clonal that Hudson is basically an MMTer, especially from his gang of 8 postings. I think one should generously interpret what he is saying as merely a manner of speaking. It is perfectly reasonable to call bailouts a tax. Note he is saying any government expenditure is a tax – spending is the real taxation. And he is mainly talking about Europe, not the US. Dean Baker doesn’t get MMT / creditary economics yet, but he is getting ever closer.

NY Times, August 11, 2011
A debate between five economists on “Why Aren’t Germans Protesting?”

Rightly Disgusted at the Banks

A bailout, like any other government expenditure, is a tax. Someone must pay all this money. And it is unfair to tax the broad population to pay for a special interest. Instead of being a progressive tax policy, bailouts enable bad behavior by the financial elite, sticking taxpayers with the cost.
——————————
What the heck is wrong with Hudson. The bailouts were paid with “taxpayers” money. Is he confusing Europe with the US? He seems to wobble a lot on the boundaries of the paradigm.

Uh, if you notice the current political debate, it’s about reducing government social spending instead of raising progressive taxes, cutting tax spending by closing loopholes and ending subsidies, or cutting military expenditure. Cutting social spending is essentially a tax on the bottom (which is not taxed) and the middle class (which is already taxed regressively).

This is what the present political kerfuffle is about. It is assumed that the deficit/debt is too large and cannot be increased, to the funds allocated to wars, bailouts, subsidies (including tsys interest) has to be “paid for” by cutting social spending. Everyone but progressives and MMT’ers seem to agree.

Progressive want to pay for this by cutting back on the military and raising progressive tax rates, as well as closing loopholes and ending subsidies. MMT, of course, has a different analysis and approach, but since it doesn’t speak in terms of the mainstream paradigm, it is marginalized and gets no traction.

Hudson knows the MMT paradigm but seldom speaks in terms of it. Apparently, he finds greater effect in speaking in terms of the prevailing universe of discourse. I think the same is true of Dean Baker.

I agree almost completely with Warren with the power of the fiat money system, BUT then why in the world did S&P downgrade US Bonds unless a 4-trillion spending cut is on the table?

According to the guidelines for bond credit rating (Wikipedia):

An AAA rating means that the “obligor has EXTREMELY STRONG capacity to meet its financial commitments.”

Given that the US can print US$ and pay the creditors, the US does have strong capacity to meet its financial commitments, unless the Congress decide not to raise the debt ceiling. But this is a political issue. Every government should know that deficit spending is often necessary to grow the economy over time.

Now, why then does S&P care about how much deficit the US has? It was even able to bring on the table this magical number of 4-trillion US$ in spending cut. What, can S&P predict that anything less than 4-trillion will lead to another fiasco in the Congress, which leads to a potential default (not raising the debt limit), in the future?

Many economically weak countries cannot simply print their own currency to meet their obligations, because that would translate (in the presence of fear) an immediate drain of their foreign reserve. But the US is different.

The last paragraph you cite is incorrect. A country that has a free-floating fiat currency can always pay off its obligations denominated in its own currency. Foreign reserves are irrelevant unless the country wishes to keep the value of its currency at a certain value in which case it is not free-floating.

There is a serious potential problem though. The exchange rate of the currency could drop considerably in which case the price of essential imports could rise a lot: food and energy in particular. That could also trigger off a rise in prices, so inflation to varying degrees. This could be a problem for poor countries especially.

Lula — S&P has become nothing more than a political hack. Even if they understand that the US can always pay their bills, (they may not understand), they are just trying to help the bankers and wealthy shrink the federal government. If they can do this, the people on the bottom of the totem pole (economically) will suffer the most. I have come to believe there is a wider understanding of MMT among the policymakers than they would admit. If there was a broad understanding and acceptance of MMT, the public would be demanding more deficit spending. With a bigger pie to cut, there is more for everyone. If the pie is smaller, it is always the relatively disadvantaged that lose.

Basically, the less the government spends, the more that will be borrowed from the private sector. This is really what “crowding out” means to them — government deficits crowding out their business by making people independent of private borrowing. This is what MMT means about offsetting saving desire. If saving desire is not offset, then people either have to cut back spending, draw down savings, sell assets, or borrow. Low rates and easy credit draw then into borrowing. That had been the USA business plan until it blew up. Now the push is on to start it up again.

Michael Hudson explains that this is all about FIRE forcing debt peonage. And since most of the large corporations now have financial arms, it is not only banks that profit.

Question is what % is spent and what % is saved. Those the the top are at the top because they ave predominantly savers, i.e., make more than than they wish to consume as a matter of choice. Those at the bottom are at the bottom because they are of necessity or choice predominantly consumers.

It’s true that those at the top are responsible for about 40% of national consumption, but even so, look at the figures that show income and wealth concentration at the top and increasing indebtedness at the bottom until the crisis forced saving.

Friends, I’m concerned. I fear that too often, we on the left retreat when we should attack, surrender when we should vanquish. What do I speak of? Well, I am concerned that too many of us are willing to play in the frame, the box, the straighjacket of modern discourse about fiscal and monetary policy. Obama does it. The NDP does it. Even some of my fellow PEF bloggers do it.

And I understand why. Some haven’t been exposed to theoretically, empirically and institutionally-grounded alternative ways of thinking (I’m thinking Modern Monetary Theory or MMT here) about these issues and so they do a heroic job with the tools they possess. Others have been exposed but aren’t convinced. Fair enough. These things take time. Still others have been exposed, are convinced but think the whole point is moot because if you step outside of the policy box, you get ridiculed, ignored, marginalized and that can’t be good for anyone, can it? I get that.

I suspect the government would view the chance to operate without revenue constraints as an opportunity to enrich well-connected big businesses and other special interests, wage wars, fund massive anti-crime and incarceration projects, and make life more difficult for anyone out of favor.

In other words, MMT-enhanced government would look a lot like the actual, real government we have today—only more so.

My reply to JC would be

“No John, the world according to MMT would look like the world FDR put in place, but only more so! You forget MMT calls fro much tighter regulations!”

This is the problem with people reading a short description of MMT and concluding that it is only an operational description of the monetary system and concluding that MMT economists have not considered such obvious issues.

Trouble is GOP has always, well since the times of Reagan at least, understood that government faces no revenue constraint. This lopsided system where deficit doves dominate the democratic party just makes mockery of democracy.

Only difference between deficit hawk and deficit dove is timing; deficit hawk would like to cut the deficit right away, deficit dove would like wait a while and then cut the deficit.

There’s a school of economic thought called Modern Monetary Theory that tries to draw out the implications of the fact that governments that create currency are not fiscally constrained in the way households, businesses, or governments that don’t control their currencies are. The most readable version of MMT can be found over at the website Pragmatic Capitalism.

One problem I have with MMT is that I fear its key insight—that government is not revenue-constrained—would tempt politicians to spend more and spend badly. The notion that dollars spent by the government are dollars taken away from people who earned them (or, in the case of deficit spending, dollars that will have to be taken away from those who will earn them in the future) seems to impose some discipline.

“One problem I have with MMT is that I fear its key insight—that government is not revenue-constrained—would tempt politicians to spend more and spend badly. The notion that dollars spent by the government are dollars taken away from people who earned them (or, in the case of deficit spending, dollars that will have to be taken away from those who will earn them in the future) seems to impose some discipline.”

This is the knee jerk reaction to MMT, and it is the grip of real fear that seem to close minds to understanding what MMT actually proposes. Big obstacles, since the public trusts politicians at about the same level as venomous snakes. Carney’s cortex apparently turned off at a certain point and he revert to his snake brain.

The alternative? Adopt policy that makes people feel is safe but which does not work except for the extractors.

Sorry, but your open letter to Greenspan and the world won’t get anywhere with the Very Serious People. It doesn’t matter how much they are proven wrong, their beliefs — or at least their pronouncements — are disconnected from reality. You can point out the facts until you’re blue in the face. They’ll ignore you, or respond with insults and ignore the argument.

Raising taxes so as to rein the monetary base or debt might be necessary in a year or two so as to rein in inflation, as Krugman says. In which case it will be necessary to explain that such additional taxes involve no “austerity” whatever. Reason is that the extra tax simply removes money from the private sector which if were left there would exacerbate inflation, and inflation makes everyone WORSE OFF not better off.

If politics makes such tax collection difficult, well that wouldn’t be the first time politics has messed up an economy. Politicians in Europe and the US are currently making a fine job of bu**ering up their economies.

Likewise, instead of taxing every sale or every paycheck (requiring taxpayers to file a forest of paperwork and legions of revenue agents to check the paperwork), the easier way to drain bank reserves is to simply tax every transaction as it moves through the banking system.
Since the FRS (and I’m sure the BOE as well) already levies its own transaction fees, Congress doesn’t actually have to ever raise taxes. What’s more, because the Fed’s net earnings flow to Tsy, the Fed can control inflation with user fee revenue since the fiscal impact would be identical to tax receipts, but with rather less collection costs.

Tsy would spend what Congress orders it to spend, against which Fed coul mark up fee schedule for a net reserve drain or mark down fees for a net reserve add. If nothing else, the Fed could tighten or loosen fiscal stance a heck of lot faster than Congress could.

The trouble then is that discourages transactions – like a sales tax. Turnover is not necessarily profit, yet turnover creates jobs.

To me any sort of transaction tax exacerbates the Paradox of Thrift.

The most appropriate drain is to tax what the country has given to people, ie a land value tax. You can’t move it, if you want to keep it you have to pay, and you can’t avoid it by becoming a hoarding miser.

You assess, you charge the land tax and you confiscate the land from anybody who doesn’t pay. The percentage then moves up and down to drain excess bank reserves. It works exactly like floating mortgage rates.

@Neil Wilson,
I agree that land value tax is the best way to go, in the US, Tsy could do this by adding imputed rental value of land to income tax base. I should hasten to add that the govt taxes too much now. So if land taxes (or transaction fees) are added they should be used first and foremost to zero out other taxes. But just as electric utilities make a distinction between baseline and peak time power needs(nukes around the clock while fast-starting natural gas turbines fire up at peak times and turned off afterwards), the land tax and Pigouvian taxes can and should be the “baseline” tax base, but to deal with “peak time” inflationary pressure, what’s needed is a reserve drain that can start up fast and afterwards, can be powered down quickly. Nothing beats Fed bank transaction taxes on that score.

There is a distinction, at least in the United States between taxes and user fees. Only Congress can levy or adjust taxes (perhaps they could index payroll or other tax rates to the unemployment rate). However, federal agencies are typically free to set their own user fees to cover direct or indirect (externality) costs of providing services. The criteria for setting Fed transaction fees is, “Over the long run, fees shall be established on the basis of all direct and indirect costs actually incurred in providing the Federal Reserve services priced…”http://www.law.cornell.edu/uscode/12/usc_sec_12_00000248—a000-.html

If we use the the Quantity theory of money equation— Price = Velocity * Money supply– price inflation is the result of excessive monetary transactions. Since “over the long run” every FRS bank transaction incrementally adds to the Velocity of money, “the indirect cost” of any Fed transaction is price inflation. Therefore, the Fed governors could adjust their transaction fees to counter the inflationary effects created by this Velocity * Money. Whether it works by “discouraging” Velocity or by draining Money from reserves is besides the point if the concern is inflation, not insolvency.http://www.federalreserve.gov/paymentsystems/pfs_feeschedules.htm

@WARREN MOSLER,
“I for one would drastically reduce my usage of the banking system if it was taxed”
If inflation is the problem to address, then taxing money velocity is simply a Pigouvian tax. Bank usage stays constant, reserve drain, a reduction in usage would be a velocity drain. In terms of reducing inflationary pressure, Uncle Sam wins either way.
Once the inflationary peak time is over, the FRB can then reduce or zero out its fees (current half a billion a year take is close enough) much faster than Congress could ever cut taxes. After which, you can put away the gold coins and duffel bags full of Euros and start using the banking system again.
I kid I kid! Look at it this way, if the Fed agreed to maintaining a positive FFR, they would be tempted to relapse into old habit every time inflation nudged above 2.5%. Giving the Fed governors a fiscal policy tool they can use instead of falling back on old habits, would be a prudent exercise in harm reduction, like setting up a methadone clinic for (barely) reformed addicts.

making payment outside the banking system doesn’t alter velocity or spending

beowulf Reply:August 12th, 2011 at 6:34 pm

@WARREN MOSLER,
Oops, I meant to say… if the Fed agreed to STOP maintaining a positive FFR.

beowulf Reply:August 13th, 2011 at 11:17 pm

@WARREN MOSLER,
“making payment outside the banking system doesn’t alter velocity or spending”
The transaction fee would have be rather enormous (unlikely in any event) to push payments to a non-dollar clearing system. Any payment transaction in dollars, the Fed governors can regulate (and levy fees).In 1987, Congress enacted the Expedited Funds Availability
Act (EFAA), which gave the Board, for the first time, the authority to regulate the payments system in general, not just those payments made through the Reserve Banks.(p. 2)http://webcache.googleusercontent.com/search?q=cache:MRiCIYSjsyMJ:www.federalreserve.gov/pf/pdf

@Anon,
Its not about “punishing” the banks or anyone else. Any govt levy on a company is going to be passed through to either workers, owners or customers. How its split up depends on the market power of the various players. Greg Mankiw had an interesting post about FAA excise fees last month that touched on this.http://gregmankiw.blogspot.com/2011/07/question-about-tax-incidence.html
The idea is simply this: if the economy is nearing “peak time” full employment (and we can agree that taxes need to be cut dramatically before that comes about), what is the most timely and effective way to “take the punchbowl away” with fiscal policy?
Since fiscal tightening requires either spending cuts or tax increases, bank customers in aggregate are going to take a hit in their accounts, one way or another. If Fed user fees were based on percentage of value (instead of its current flat fees per transaction), the percentage levied could be temporarily adjusted across all bank transactions almost instantly. As Andrew Jackson (the rsj of his day) might say, just “as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing”. :o)http://en.wikiquote.org/wiki/Andrew_Jackson
If you think this is politically infeasible, we could take advantage of the fact forced savings are the functional equivalent of taxes (the best example being the voluntary in name only war bond drives during WW II). We could get the same fiscal tightening even if transaction fees levied were diverted to customer retirement/time-deposit accounts instead of to Tsy.

It’s not really about reserve drain, which is the means not the end of payment.

Banks have to pass on the cost to customers obviously – highly visible and highly annoying to the regular customer. Unintended punishment of decent customers just trying to pay a few bills by those who want to punish banks.

Seems like most of the “inflation” trouble has come from asset bubbles, which were brought on by horizontal (bank lending) money creation. Aside from supply shock (oil) inflation, have there really been any substantial instances of true inflation in the US?

Yeah I was curious about that. It seems like we’d need to be a billion times more reckless wrt deficits than we are now to get true inflation. (Obviously a bit of hyperbole there) But I am curious as to how people can keep getting away with calling for true inflation and it never comes.

I guess its like preachers calling for armageddon and that sort…use it to scare people to believeing what you say.

I am also curious though about currency debasement wrt to MMT…what does MMT say about maintaining a valuable currency (foreign exchange rate wise) and what MMT steps are taken to do that? Is it as simple as if there is inflation and currency devaluation and low foreign exchange rates, you can just raise taxes or cut spending to reduce the amount of dollars out there in proportion to real goods/services?

Thanks. I never understood why it was such a big deal either, but thats always what people bring up, “The dollar will be worthless in the world and no one will want it!”

What about purchasing power? I know thinks are okay, but people also always bring up something like, “A dollar today buys so much less than it did in the past.” It’s lost it purchasing power, blah blah

What is the best short, simple response to that? That seems to be the one piece I still need to fight back with :)

Also, one more question wrt your article. If we increase deficit spending, thats adding NFA to the economy on a vertical level to help keep the goods/services at home, right? It increases the money supply.

But exports are paid for by money that was already created, right? So selling exports does not lead to new net money creation?

Would exports then be a better option in an inflationary environment, rather than a larger deficit?

Yeah, Ive read basically all your writings, and a number of others like Wray. Ive been an online/blog MMT student for about 6 months now. Its great so far.

I’m a biologist in reality and am only 24 years old, so I dont have any financial experience at all in markets or in theory from college. So Im basically learning everything from scratch. So hopefully my questions dont come off too stupid sometimes as I’m still learning alot.

Thanks for all the responses Warren, they help. Btw, my dad runs a business and he’s a closet MMTer. But not because of reading MMT online, he just seems to be really in tune with the business world and monetary realities. He was the first one that got me looking into MMT when he said to me “we can’t go broke because we run the printing presses” about 6 months ago. I think I have to get him a copy of your book to validate to him what he said, and also to pay him back for getting me into MMT indirectly!

If you divide almost any good that existed “way back when” by the minimum wage that same year, you will get the number of hours of labor to buy. That number – hours of labor at minimum wage to buy – fluctuates little over the years. It works for food, cars, most things you need to live.

And the price of internet access, jet airline travel, on-demand TV, iPods, cell phones, was all infinite back in 1950.

Some people save dollar denominated assets to purchase things when their labor no longer will. (Retirees, disabled, pensioners). If their assets (which are denominated in notional dollars) will no longer buy what they reasonably expected ex ante, they have lost to inflation.

True. But I don’t think you can construct a world where there is a guaranteed purchasing power return on savings.

I’m not sure I have seen it discussed by Warren or anybody in MMT, but since you don’t need savings for investment, what need is there for savings at all? Forcing people to save becomes a huge cost to the economy.

yes. It would appear this downgrade has woken up some people to say the least and now that big guns are coming out, things are looking positive.

This is really, really good for MMT.

The farther they push the neo-liberal line and go even more extreme, the more thinned out they become and therefore greatly increase the probability of failure. Their own process of existence is their very demise. Muhahahaha

Now it’s only a matter of time.

It will be interesting to see how the media spins this, if they can at all. More than likely they’d attempt to disregard it I’d say.

Warren, can you get onto Huff-Po with this article or something like it? That would be good if you could.

“…for the time being the MMT people and yours truly are on the same side of the policy debate.” Seems he is offering an olive branch; debate the nature of deficits and debt later, cooperate to affect public policy NOW. Other mainstream economists have a similar message. Saw Christina Romer on Maher last night, much the same.

more important than the message is the reason behind the message. he supports it with reasons that are not supportable

rvm Reply:August 11th, 2011 at 12:16 pm

Think I was kind:

Dear Mr. Krugman,

Unfortunately the pseudo public debate in US and in the rest of the world is conducted by the so called deficit hawks and deficit doves only. You would never hear about the existence of another rear bird – deficit owl. No owls around public debate table.

I like how Mr. Warren Mosler characterize the economic and political situation today. He cites a surprised carpenter:

“No matter how much I cut it is still short.”

I also noticed you didn’t find any time in your busy schedule to study what really MMT (Modern Monetary Theory) stands for. Don’t miss the last train and educate yourself!

Somewhere on this site there is a picture of Krugman holding a copy of The 7 Deadly Innocent Frauds of Economic Policy. Smile on his face and a twinkle in his eyes.

rvm Reply:August 12th, 2011 at 10:19 am

@ Dave Carr,

Yes, I saw it when it appeared. I don’t understand his game.
Why does he continue with the same “deficit don’t matter” thing after all the comments he received regarding his first MMT related blog?! Is he insane, lazy or there is something else?

Somebody needs to explain why exactly it makes any difference in which currency the debt is denominated.

If a country can always print enough of its own currency to repay any debt denominated in its own currency, it can also print enough of its currency to buy whatever foreign currency its debt is denominated in?

So I’d say the only relevant point is the net saving desire of your currency by the domestic and the foreign sector.

as far as I understand it, the reason the currency matters is simply b/c of any spread that can develop between the two valuations.

For example, some Eastern European nations apparently took loans out in swiss francs. Well they are sitting on some serious pain right now b/c the franc is through the roof. The differential is ripping their face off.

if your debt is in foreign currency and you attempt to buy that foreign currency with your own – and if the amounts are significant enough – the value of your currency will plummet and will make your debts much bigger.

Not necessarily, it depends on the desire to net save in each currency.

A country can always pay its debt denominated in its own currency by creating more currency. But if the creditors don’t want to hold the currency they will exchange it for another one and the value of the currency can also plummet.

So, unless you don’t have a convertible currency I am not sure it makes any difference whether the debt is denominated in your own currency or not.

I’d say a country is constrained in its spending by the desire of the foreign sector to hold its currency, and debt in a foreign currency is the result of that constraint.

if creditors (or citizens) do not want to hold your currency – it will plummet – no matter if you spend more in it, or as usual, or even less than usual.

The difference between debts in your own currency and those in foreign currency – is that you can always pay debts in your own currency, while before you pay the debts in foreign currency – you have to acquire it. In the process of acquiring – if the sums are large enough – it the value of your currency drops.

So when you spend your own currency – it is up to the holders of it to sell it or not, but if you pay debts in foreign currency – you HAVE to sell your currency to get it.

That is how it seems to me.

Héctor Reply:August 11th, 2011 at 2:25 pm

@MamMoTh,
But Argentina or Russia don’t borrow in USD because they are stupid. It’s not like Argentina wouldn’t like to borrow in its own currency, the problem is that nobody wants to lend in pesos. So can you say that any country that issues its own currency is not dependent on tax revenue or foreign borrowing to be able to spend?

Argentina does not need to borrow in pesos. It just has to spend in pesos for all domestic needs and not try to defend the foreign exchange rate (if it does it) by borrowing dollars.
For imports it still needs foreign currency, of course. But if it should limit any borrowing in foreign currency to minimum.
Taxes are needed to keep up the demand of peso.

That is how I understand it…

MamMoTh Reply:August 11th, 2011 at 3:15 pm

@Héctor, that was always my point, countries don’t borrow in US$ because they are stupid but because they have no choice. Although sometimes it seems they are stupid when they borrow from the IDB, or the World Bank to build schools and hospitals.

@WARREN MOSLER, that would be if the currency spent in buying fx is spent by the seller of fx, which is not necessary that case and could be avoided by sterilizing the purchase, i.e. replacing dollar denominated debt with sovereign debt.

@MamMoTh, No, there is a huge risk in foreign currency insolvency. Inflation and devaluation of domestic currency can be such that they can cause insolvency in foreign currency. The foreign debt can approach infinity in domestic currency terms faster than the domestic economy can grow, faster than the state can pay domestic currency. Floating a currency is a good idea, not magic.

A state can inflate as much as it wants, devalue as much as it wants, print as much of its own money, run its economy wonderfully well, export as much as it can, sell off all its assets & its people into slavery, but if its foreign debt is big enough, and foreign desire for saving in its (inflating, devaluing?) currency is not big enough to make up for this, then its foreign debt can be unpayable. Switzerland could not run up a quadrillion dollar debt, blow it all on cocaine, go back to work and then pay this debt due next year.

MamMoTh Reply:August 12th, 2011 at 11:33 pm

@Calgacus, as long as the swiss franc is traded and floating, it can buy back the dollars from the cocaine dealers and pay its debt due next year.

@MamMoTh, No it can’t. With what? Swiss francs are worth next to nothing in this scenario. It blew the money on cocaine – up Swiss noses. It no longer has the cocaine. Big enough foreign debts can be unpayable, even by the best run, most MMT-directed, most innovative & productive economy of all time.

MamMoTh Reply:August 13th, 2011 at 9:25 am

@Calgacus, you are assuming the swiss franc becomes worthless to the point it will not be traded anymore, which is what brings insolvency. But as long as it remains traded and floating there is no insolvency risk, the only risk is inflation and devaluation.

It all boils down to the desire to net save in your own currency by the non government sector. A country with its own floating currency can always print money to service its debt regardless if its denominated in its own currency or not. The inflation and devaluation that follows depends on the desire of the non government sector to net save the added currency.

I think MMTers have the constraint backwards concerning debt denominated in a foreign currency. This is evidence of a lack of desire to net save a country’s currency, especially by the foreign sector.

@MamMoTh ,A country with its own floating currency can always print money to service its debt regardless if its denominated in its own currency or not. Absolutely wrong. Only in domestic currency.

A printed franc will always pay off a franc in debt. But the number of dollars of debt it can pay off can go to zero. No matter how many francs the state prints to pay off foreign debt, it is a finite number. Multiply that by the dollar value of the franc, and you will get another finite number. This second number is bounded. (The only way it could not be is if there is an utterly irrational, utterly unrealistic desire to indefinitely save newly printed Swiss francs.) No matter what the Swiss do, there is some number of dollars above which they cannot pay a debt due at a fixed time.

I am not assuming that the Swiss franc will not be traded. I explicitly stated that if “foreign desire for saving in its (inflating, devaluing?) currency is not big enough to make up for this” then it can become insolvent in the foreign currency.

The inflation & devaluation caused by excessive money printing to service a foreign debt, can cause (really demonstrate) the insolvency in the foreign currency. Realistically, foreign savings desires would be minimal in a super-indebted country. And domestic savings desires in an inflating, devaluing currency would also be minimal.

States do not have any sovereign power and special status when they are dealing in foreign currencies. They are just like people & companies – that can become too indebted to pay off debts, no matter how they try. To another state, a state’s domestic currency is just internal company scrip that it uses in company towns. No matter how many frequent flier miles an airline issues, it can still go bankrupt.

@MamMoTh, Yes, MamMoth, I agree: “It is all about the desire to net save in your own currency.”

But so what? And the desires – when? Foreign superindebtedness, especially denominated in foreign currency –> Low savings desire anywhere for domestic currency. What you are saying amounts to saying you won’t go broke if people will always accept/save some sum of your IOUs in return for sufficiently many of their IOUs. Sure, if you can always get a $10 loan from the bank in return for a $100 debt due in one year, go ahead, and Ponzi be with you. True, but not very likely.

“The ability to repay the debt printing your own currency is determined by the desire to save in your own currency, regardless of the currency of denomination of the debt.”
Not at all. There is a big difference between currencies. A state or anyone else can ALWAYS nominally repay debt denominated in their own currency – because all that is being asked at repayment is redemption of an old promise – a bond – for another promise – currency. The savers in your currency debt have no choice. It is not “determined by the desire to save in your own currency” currently. The decision to save was already made in the past when they acquired your bonds. They can destroy the promise/debt/bond – you are off the hook. Keep the promise/debt, for whatever it is worth. That’s it. What they CURRENTLY desire has nothing to do with it.

When a state goes into debt in a foreign currency, it is just like an ordinary US citizen having a dollar debt. It can become unpayable. Whether he will be bankrupt or not depends on whether the original lender or 3rd parties are willing to save/accept his IOUs now, it depends on their savings desires NOW. Not what they did in the past, not their PAST savings desires, which was the case for domestic currency debt.

Yes, you end up in the same situation domestically (devaluation/inflation) if the non-government sector does not save in it and dumps it. You can have a domestically-denominated sovereign debt which is unrepayable “in real terms”, unrepayable while keeping the currency at an uninflated value. But the domestic value of foreign-denominated debts is not controlled by the borrowing nation. The inflation/devaluation/”unrepayable in uninflated terms, but payable in nominal terms” domestic currency debt situation translates to inflation/devaluation/”default even in nominal terms” foreign currency debt situation.

Domestic money printing or ANYTHING that one country can do by itself can not pay off arbitrarily large foreign debts. MMT is not magic. Borrowing in foreign currencies is generally a bad idea. You can always deliver on your own promises to make another promise. You can’t always deliver on your promise that another guy will make a promise.

Clonal Antibody Reply:August 14th, 2011 at 10:28 am

@WARREN MOSLER, Anybody who has been on the wrong side of a convertible preferred loan, will tell you that once you are unable to meet the loan obligations, you are no longer in the drivers seat. The company can issue however may shares it wants. The creditor can always drive the price of the stock down to the level that the creditor wants. The end result is unless the creditor is friendly, the ownership of the company changes hands. I can tell you first hand that the picture is not pretty for the corporations while negotiations are ongoing!

That I believe was the difference between France and Germany. A friendly creditor vs an unfriendly creditor.

When a state goes into debt in a foreign currency, it is just like an ordinary US citizen having a dollar debt. It can become unpayable.

Wrong, the state can always print its own money, citizens can’t.

The savers in your currency debt have no choice. It is not “determined by the desire to save in your own currency” currently. The decision to save was already made in the past when they acquired your bonds.

People holding debt in your currency is evidence of desire to save in your own currency.

Otherwise they wouldn’t hold it and you would have to borrow in foreign currency.

So the real constraint is the desire by the non government sector to net save in your currency.

You are assuming that this desire doesn’t change suddenly and I agree with that. But that is the constraint nevertheless.

@MamMoTh ,Wrong, the state can always print its own money, citizens can’t. Citizens certainly can print their own money. Airlines can create frequent flier miles. As Minksy said, anyone can create their own money, the problem is getting others to accept it. Draw your picture with some numbers on a piece of paper, and see what you will get for it. A sovereign state borrowing in foreign currencies is exactly like a US company or individual borrowing dollars.

So the real constraint is the desire by the non government sector to net save in your currency. Yes, true in some sense, but uninformative, and not supporting the conclusions you draw. There is a huge difference between domestic and foreign denominated debt. Issuing & trading domestic-denominated debt simply is not borrowing, the way the word is normally used. It’s just offering a savings account instead of a checking account. Issuing foreign denominated debt is real borrowing. The “net savings desire constraint” in no way implies that domestic & foreign denominated debt are equally easy to pay off. One always, the other not always.

Sure, they are both debts. They might even both be eventually settled identically in negotiation with creditors. (Where the ultimate “settlement” means creditors buying real assets.) But the foreign denomination can get arbitrarily large in terms of domestic. Taking on foreign debt can be like taking on an infinite domestic debt. You can always write a specific number on a piece of paper. You can’t always write a number which is equal to twice the number you are writing. Domestic-denominated debt-settlement might mean inflation, which one can think of as a form of default. Foreign-denominated debt settlement can mean just plain default, which everybody considers default.

You are assuming that this desire doesn’t change suddenly and I agree with that. But that is the constraint nevertheless. I am make no such assumption. If anything the reverse. When you wrongly equate domestic and foreign denominated debt, you are the one saying savings desires don’t change suddenly. They do. You are going along OK, and then the bank calls in your loan, and you can’t refinance. There’s a boom & easy credit, and then a bust, and you are broke. Happens to countries too, which are foolish enough to take on large foreign-denominated debt.

MamMoth, when you say – ‘foreign denominated debt, no problem, just like domestic denominated’ you contradict much of the basics of MMT & common sense.

MamMoTh Reply:August 14th, 2011 at 5:29 pm

@Calgacus, we clearly disagree so there is no need to keep discussing past each other.

I don’t think I am contradicting the basics of MMT and even less common sense.

Yes, citizens could print their own money to settle debts if it is accepted. So that is my point, it’s all about the desire to net save your new currency.

Countries which chose to default on foreign denominated debt do it in order to stop the spiral of inflation and devaluation of their own currency that you mention, which is the point I’ve been making all along: that the constraint is inflation and devaluation, and that’s it.

@MamMoTh, OK, last try then. I note that you said “net save your new currency” adding the crucial word “new”, so maybe some progress. Do you still really believe “No risk of insolvency in foreign currency either as long as the sovereign currency is traded and floating. Only risk is inflation and devaluation.”? Every MMT (& any other) publication that I have ever read, says that this is wrong.

Countries don’t “choose to” default on foreign-denominated obligations. Why should they care about inflation/devaluation of their own currency if they could get dollars for free by printing their own currency? I wouldn’t. In reality, countries can’t make others desire to save their currency, and nobody would.

Infinite inflation/devaluation isn’t the ultimate constraint, the worst case. There’s a point beyond which inflation/devaluation does nothing. Beyond that, foreign debts are unpayable, default is forced. In the old days your country might be invaded to take what can be taken. Forced by the lack of “desire to net save your new currency” – utterly unlike the case of domestic currency/debt, which has to do with past desires, already held currency/bonds.

Yes, I still believe that solvency is only a problem for countries with fixed exchange that ultimately need to default on their debt or on their peg or both (like Russia and Argentina did) but it is not an issue for countries with a floating currency. So I disagree with how things are often presented by some MMTers, but not with MMT principles (see Warren’s reply to my comment about Japan above.)

Countries cannot force anyone to save in their own currency, I agree. That is my whole point and it’s something that is somewhat at odds with MMT: I don’t think a foreign denominated debt is a poor policy choice, because it is not a choice in most cases. (Ramanan posted an interesting link analysing this.)

I see a foreign denominated debt as evidence of lack of desire to net save the country’s currency. Since a sudden change in that desire is unlikely, printing money to buy fx to pay the debt is much more likely to trigger inflation and devaluation than when printing money to repay its own debt. Still, solvency is not a problem. Latin american countries paid their debt through deficit spending for decades without defaulting, but they had very high inflation and were continuously devaluing their currencies.

That countries can’t force anyone to save their currencies is not at all at odds with MMT.

Saw Warren’s comment too. He can’t mean that foreign-denominated debt is always repayable. Afaik all MMT scholars who have written about such debts, including Mosler, say that it is possible to be unrepayable. If he did mean that, well, I’d tell him: that’s not MMT or anything deserving the name of economics, and to go home and think about it.

MMT is not magic. If there’s a difference between a country selling its currency on fx markets to get dollars & a domestic US company selling its debt to get dollars, both to satisfy a dollar bank debt, both ultimately backed by their real assets, what is it? Answer: None at all. Sovereigns with a dollar debt turn themselves into the equivalent of US firms or individuals & can go dollar-broke.

Significant foreign-denominated debt is (almost) always a choice, and a bad one. If you need it for food right now to avoid starvation or for guns right now to avoid subjugation, OK. Otherwise, it’s a stupid way to put a noose around your neck. Otherwise “live within your means” – pay for your imports with exports, without the luxury of running a trade deficit.

The fact that you are floating and inflating can make it easier to run at full employment and export enough to pay foreign-denominated debts. You aren’t in the situation of a Greece or numberless IMF victims, which have such debts. Part of the ECB/IMF’s terms is austerity to wreck your economy, to make the unpayable debts even more unpayable.

That doesn’t mean dollar debts are always repayable even if you float, even if Mosler, Mitchell, Fulwiller, Kelton, Tcherneva, Forstater & Wray are now running your economy from seances with the shades of Keynes, Kalecki & Lerner.

A mathematical way of stating this would be noticing that infinite sums can converge to a finite, bounded result. Each (diminishing) term corresponds to how many dollars each of your devaluing currency units buy. You can spend an infinite number of Weimar Zimbabwe dollars and still not pay off your US dollar debt.

MamMoTh Reply:August 15th, 2011 at 9:37 am

@Calgacus, fine, I’m still sure you are wrong. I think Warren’s reply was clear enough.

A basic MMT principle is that a government can always buy anything that is for sale in its own currency. That includes foreign currencies. So solvency is not an issue.

MMT is definitely not magic. You cannot avoid inflation/devaluation if spending is too high. There is nothing in what I’ve said that implies any magic, on the contrary I said inflation/devaluation are always the constraint in the case of a floating currency.

Look, Argentina had hyperinflation in the late 80s probably because of the dollar denominated debt, but didn’t default. It had a fixed exchange in the 90s and defaulted in 2001. Iceland didn’t default. Russia did.

You are also confused with your mathematics analogy. As long as your currency trades at some price 1/P>0, then any foreign currency denominated debt D can be repaid printing D/P units of your currency, which is always a well defined positive real number as long as P>0.

@MamMoTh, Like I said, if that’s what Warren believes, he’s wrong. If that’s what he said, he didn’t realize what he was saying.

A basic MMT principle is that a government can always buy anything that is for sale in its own currency. That includes foreign currencies. Right

So solvency is not an issue. Wrong. As I and several others tried to explain above, at some point, the necessary amount of foreign currency just won’t be for sale at any price in domestic currency. That’s the whole point. That’s what happens in the real world, innumerable times, whenever anyone, any country goes broke.

It was not a mathematics analogy, but a proof sketch. (“n” below could be time, or the serial number of printed units of currency.)

As long as your currency trades at some price 1/P>0. That will not be true. That is your error. This assumption is violated in reality, and that is what makes your argument fail. (Makes clear to me how you could say what you have been saying.)

Of course your statements are true if the foreign value of your currency is bounded below. We agree on the logic. But this assumption is never satisfied in the real world. Print & spend enough and the foreign value of your currency goes to zero – quickly – the more you print and spend.

And this unrealistic assumption, positive lower bound of currency value, is far stronger than necessary for your argument to be valid. The foreign value of your currency can go to zero, and you still can run an fx ponzi scheme, if it goes to zero slowly enough – like (1/n) or even (1/pn) (pn being the nth prime number). You get a divergent series, with a sum going to infinity, but with each term going to zero. But if it goes to zero like (1/n^2) or (1/r^n) r>1 we have a convergent series.

The convergent series is what happens in the real world. The value of your promises/currency depreciate (probably) geometrically. The (foreign / real) value of all your currency issued, ultimately a claim on your country’s real present & future wealth, is bounded. Quadrillion dollar debts due next year are unpayable by any means, by anyone else but Uncle Sam.

if there is anything for sale with a dollar price tag on it the US gov can buy it if it wants to

MamMoTh Reply:August 15th, 2011 at 10:02 pm

@Calgacus, sorry but it is getting tiresome. Whatever you say, Warren’s reply is still clear to me.

As long as your currency trades at some price 1/P>0 solvency is not an issue. If P=0 then it is because your currency is not traded anymore. That’s my point.

Whether your currency devalues when you print it to pay a foreign debt, or rather by how much it will devalue, depends on the desire to net save your own currency, not on fanciful series.

The real world validates my point. Argentina experienced devaluation and (hyper)inflation but didn’t default on their foreign debt in the late 80s. Argentina did default on its peg and on its debt in 2001. Greece is clearly insolvent and needed to be bailed out, Iceland did not face a solvency problem.

Believe what you want, I’ll do the same and I have no problem with that.

“who insist that deficits are never a problem as long as you have your own currency”

Only Dick Cheney (allegedly) says this. In MMT, deficits are of paramount importance. They need to be ‘right-sized’.

“Someday private demand will be high enough that the Fed will have good reason to raise interest rates above zero, to limit inflation.”

Depends on how the central bank chooses to operate, as Warren Mosler and Matthew Forstater have shown.

“when that happens, deficits — and the perceived willingness of the government to raise enough revenue to cover its spending — will matter.”

In MMT, deficits always matter, as does the govt’s willingness to manage inflation and employment.

“on the (very MMT) grounds that the division of government liabilities between currency and short-term bills made no difference”

MMT doesn’t say this. It says that (1) given the central bank’s policy target, there’s an appropriate mix of the two, and (2) there’s no financing constraint on creating either form of govt liability.

“So what does this say about the United States? At a future date, when we’re out of the liquidity trap, public finances will matter — and not just because of their role in raising or reducing aggregate demand. The composition of public liabilities as between debt and monetary base does matter in normal times — hey, if it didn’t, the Fed would have no influence, ever.”

MMT recognizes this. Public finances *always* matter when the govt sector is monopoly issuer. And composition of its liabilities is a critical determinant of whether central bank hits its policy targets.

“So if we try at that point to finance the deficit by money issue rather than bond sales, it will be inflationary.”

The deficit isn’t financed. Money issue via spending precedes “borrowing,” however it might look from the outside, and however it might have worked many decades ago.

1) Deficits absolutely matter, always.
2) Composition of sovereign liabilities is critical to success of central bank operations.
3) Deficits are “money issue” and have been since at least 1973. They are not “financed” by money issue.

If anyone wants to paste these over there, feel free. I’m too busy to sign in!

Paul Krugman: “But couldn’t America still end up like Greece? Yes, of course. If investors decide that we’re a banana republic whose politicians can’t or won’t come to grips with long-term problems, they will indeed stop buying our debt.”